• Sales and collection cycle : Involve the decisions and processes

necessary for the transfer of the ownership of goods and services to

customers after they are made available for sale; it begins with a request by
a customer and ends with the conversion of material on service into an
account receivable and ultimately into cash.

• Business functions for the sales and collection cycle : The key
activities that an organization must complete to execute and record business
transactions for sales, cash receipts, sales returns and allowances, change off
of uncollectible account, and bad debt expense.

• There are eight business functions for the sales and collection cycle:

• Processing customer orders

• Granting credit

• Shipping goods

• Billing customers and recording sales

• Processing and recording cash receipts

• Processing and recording sales return and allowances

• Charging off of uncollectible accounts receivable

• Providing for bad debt

• Classes of transactions in the sales and collection cycle: The

categories of transactions for the sales and collection cycle in the typical
company; sales, cash receipts, sales returns and allowances, change off of
uncollectible accounts, and bad debt expense.

• Customer order: A request for merchandise by a customer. It may be

received by telephone, letter, a printed form that has been sent to
prospective and existing customers, through sales people, on through
 electronic submission of the customer order through the internet on other
network linkage between the supplier and the customer.

• Sales order: A document for communicating description, quantity and

related information for goods ordered by a customer. This is often used to
indicate credit approval and authorization for shipment.

• Shipping document: A document prepared to initiate shipment of the

goods, indicating the description of the merchandise, the quantity shipped
and other relevant data. The original is sent to the customer and one or more
copies are retained. It is also used as a signal to bill the customer, one type
of shipping document is a bill of lading.

• Billing customers and recording sales: Billing of the customer

includes preparation of a multi copy sales invoice and simultaneous updating
of the sales transactions file, and general ledger master file for sales and
accounts receivable. This information is used to generate the sales journal
and along with cash receipts and miscellaneous credits, allows preparations
of the accounts receivable trial balance.

• Sales invoice: A document indicating the description and quantity of goods

sold, the price, freight charges, insurance, terms, and other relevant data,
the sales invoice is the method of indicating to the customer the amount of a
sale and due of a payment. The original is sent to the customer and one or
more copies are retained.

• Assess planned control risk – sales: The auditor uses the information
obtained in understanding internal control risk. There are four essential steps
to this assessment:-

1. First – the auditor needs a framework for assessing control risk.

2. Second – the auditor must identify the key internal controls and
weaknesses for sales.

3. After identifying the controls and weaknesses the auditor, the auditor
associates them with the objectives.
 4. Finally – the auditor assesses control risk for each objective by
evaluating the controls and weaknesses for each objective.

• Evaluating cost – benefit of testing controls: After the auditor has

identified the key internal controls and weaknesses and assessed control risk,
it is appropriate to decide whether substantive tests will be reduced
sufficiently to justify the cost of performing tests of controls.

• Design tests of controls for sales: For each control the auditor plans
to rely on to reduce assessed control risk, he or she must design on or more
test of controls to verify its effectiveness. In most audits, it is relatively easy
to determine the nature of the test of the control.

• Design formal audit program: The audit procedures resulting from the
auditors decisions about the appropriate audit procedures for each audit
objective; this audit program is used to prepare a performance format audit
program.

• Lapping of accounts receivable: The postponement of entries for the

collection of receivables to conceal an existing cash shortage; a common
type of defalcation.

• Performance format audit program: The audit procedures for a class

of transactions organized in the format they will be performed; this audit
program is prepared from a design format audit program.

• Proof of cash receipt: An audit procedure to test whether all

recorded cash receipts have been deposited in the bank accounts by
reconciling the total cash receipts recorded in the cash receipts
recorded in the cash receipts journal for a given period with the actual
deposits made to the bank.
• Accounts receivables master file: A file Used to record individual
sales, cash receipts, and sales returns and allowances for each customer and
to maintain customer account balances. The master file is updated from the
sales, sales computer transaction files. The total of the individual account
balances in the master file equals the total balance of accounts receivables in
the general ledger.

• Remittance advice: A document that accompanies the sales invoice

mailed to the customer and can be returned to the seller with the cash
payment. It is used to indicate the customer name, the sales invoice number,
and the amount of the invoice when the payment is received.